Which price index compares the cost of the current basket of goods with the cost of the same basket in an earlier period, so its weights change each time it is calculated?
Correct Answer
C) The Paasche index
The Paasche index compares the cost of the current basket with the cost of the same basket in an earlier period, so the weights differ each time. The Laspeyres index uses fixed base-period quantities.
Why This Is the Correct Answer
Option C is correct because the Paasche index compares the cost of purchasing the current basket of goods with the cost of the same basket in an earlier period. Its prices are weighted by current-period quantities. As a result, the weights are different each time the index is calculated.
Why the Other Options Are Wrong
Option A: The Laspeyres index
Option A, the Laspeyres index, uses fixed base-period quantities as weights. Its weights do not change with each calculation, which is the opposite of the description.
Option B: The Fisher ideal index
Option B, the Fisher ideal index, combines the Laspeyres and Paasche indexes rather than simply using the current basket. It does not match the single current-basket method described.
Option D: The median price index
Option D, a median price index, tracks the middle sale price of a group of sales. It does not price a basket of goods with quantity weights, so it does not fit the description.
Paasche equals present basket
Paasche and present both start with P, so Paasche uses the present, current-period basket. Laspeyres looks back to the base period.
How to use: Use the P-for-present link to match Paasche with current-period weights.
Exam Tip
Look for clue words: current basket or changing weights points to Paasche, while fixed base-period quantities points to Laspeyres.
Common Mistakes to Avoid
- -Confusing Paasche with Laspeyres weighting
- -Thinking a median price index uses basket weights
- -Assuming all price indexes hold weights fixed
Concept Deep Dive
Analysis
This question tests your ability to tell price index methods apart. An index that compares the current basket with the same basket in an earlier period uses current-period quantities as weights, so the weights change each time it is calculated. That describes the Paasche index.
Background Knowledge
Price indexes measure changes in prices over time. A Laspeyres index uses base-period quantities, while a Paasche index uses current-period quantities, so its weights change with each calculation. Appraisers encounter these indexes in construction cost and housing price data.
Real-World Application
An appraiser reviewing construction cost data reads that a new-housing price index uses current-period weights. The appraiser understands that the mix of homes behind the weights changes each period. That helps the appraiser interpret index movements with care.
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